Expect 15-20% upside from MCX IPO: Unicon Investment

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Expect 15-20% upside from MCX IPO: Unicon Investment

Unicon Investment has come out with its report on Multi Commodity Exchange of India Ltd (MCX) IPO. The research firm recommended subscribing the issue with 15-20% upside for long term investors.

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Unicon Investment has come out with its report on Multi Commodity Exchange of India Ltd (MCX) IPO. The research firm recommended subscribing the issue with 15-20% upside for long term investors.

Multi Commodity Exchange of India Ltd (MCX) is an electronic commodity futures exchange, set up by Financial Technologies (India) Ltd in 2003. It has permanent recognition from the Government of India to facilitate online trading, clearing and settlement operations for commodity futures across the country. It has more than 2,100 registered members operating through over 247,000 terminals (including CTCL), across India. MCX is the fifth largest commodity futures exchange globally, in terms of the number of contracts traded during the six months ended June 30, 2011. It is the largest silver exchange; the second largest gold, copper and natural gas exchange; and the third largest crude oil exchange in terms of the number of contracts traded in each of these commodities (in CY10). It offers more than 40 commodities across various classes such as bullion, ferrous and non-ferrous metals, and a number of agri-commodities on its platform.

Strong Industry growth with dominant market share provides strong revenue visibility: Indian Commodities market (futures) has grown at a CAGR of ~54% over FY10-12* (annualised) while MCX's market share has increased from ~82% levels in FY10 & FY11 to 87% in 9MFY12.

Wide product portfolio with strong International alliances strengthens growth prospects: MCX's product portfolio has grown from 15 to 49 over 2004-11. Currently, ~85% of its turnover is through metal and energy commodities, which command higher transaction fees compared to agricultural commodities contracts. MCX has international alliances with LME, NYME, LIFFE, Baltic Exchange, Sanghai Futures Exchange and Taiwan Futures Exchange; which increases its geographic presence and international acceptability.

Strong technology platform provides room for scalability and margin expansion: MCX's technology platform and business model are highly scalable and have the potential to generate better margins at greater volumes (due to fixed and semi-fixed nature of major costs). Increased trading activity on the Exchange would increase profitability.

India's GDP growth rate of 7-8% would stem the growth in physical markets, thereby supplementing the growth in futures market. Introduction of options and index trading and allowance of institutional investors would drive the markets and benefit companies like MCX immensely. MCX's well established clientage, strong brand recall, wide product portfolio and high tech trading platform ensure its dominant position in the commodity markets. MCX doesn't have any listed peer in Indian markets, hence based on global peer set we believe the company is trading an attractive valuation of 15.1-18.1x its annualised FY12 EPS of INR 57. We recommend SUBSCRIBE with 15-20% upside for long term investors.

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To read the full report click on the attachment